Concerns about the crisis in the euro zone and the effect of sweeping regulatory changes on bank lending have pushed confidence in London’s commercial property market to the lowest level in two years.
According to an industry survey by Lloyds Banking Group, the largest lender to the property sector in the UK, the net balance of respondents expecting the market to improve in the next six months fell to 2.8, compared to 32.2 at the end of August, suggesting that confidence is at its lowest since the index started in 2010.
The sharp decline, which tracks a wider unease about the prospects of the UK property market, comes as banks pull back from property lending amid pressure to reassess the risk of debt secured against property.
But receding confidence in the prospects of the market for offices and shops in the UK capital marks a step-change in investor thinking about the possible fallout from the euro zone crisis.
Until recently, London, buoyed by international demand, was seen as being able to weather the storm battering regional property markets.
“It would seem that fears about the stability of the world economy are continuing to impact upon the confidence of those businesses operating in the UK commercial property sector,” said Lynda Shillaw, managing director of corporate real estate at Lloyds. “There appears to be a recognition that the challenging economy is going to be here for far longer than anyone anticipated.”
In spite of the fall in confidence about the London market, the capital continues to account for the significant bulk of all overseas investment in the UK commercial property sector.
Foreign institutions from the US, Asia, the Middle East and Europe spent £10.21 billion on commercial property in London during 2011, representing 77 percent of the total £13.2 billion overseas spend in the UK, according to data from Real Capital Analytics.
“London commercial property has proved resilient, buoyed by international demand and limited new supply, but the latest survey paints a more subdued picture,” said Andrew Smith, global head of property at Aberdeen Asset Management. “Despite this, there remains a modest but general appetite to increase property investment.”
Overall confidence in the UK commercial property sector continued to decline, having fallen during the previous quarter for the first time in almost a year.
Lloyds is well placed to gauge industry sentiment, having inherited a large loan book from its takeover of HBOS. The group owns more than £60 billion ($93 billion) of commercial property loans.